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Investing in the oil market

The crash in oil prices would be felt by countries and oil companies that heavily rely on oil for the lion share of their income.

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Bonny light, Investing in the oil market

US oil prices turned negative for the first time in history this week. The crash in prices would be felt by countries and oil companies that heavily rely on oil for the lion share of their income. Countries such as Nigeria that depends on oil revenue to finance her budgets are deeply affected by this declining oil prices.

The effect of low prices has a negative impact on the Nigerian economy, which inadvertently affects her citizens. Already, we have witnessed, the value of the naira depreciates to the dollar and other global currencies—no guesses what this would mean in the business and economic environment.

 However, you can hedge yourself from your country’s economic misfortunes by personally profiting from the oil market volatility. This article is for people who are interested in investing in the oil markets. If you’re thinking of oil investing, you’re definitely not alone. A lot of people have made a few inquiries on how to invest in the energy market. Well, there are several ways to go about this, from indirect exposure through an energy-related stock or direct trading and speculation of oil futures in the commodity market.

READ MORE: Naira crashes further at the parallel market due to dollar scarcity, lowest since 2017

Firstly, let me drop a brief overview of the commodities markets. The commodity markets involve the buying and selling of commodity instruments in the form of derivatives, options, or futures in both international and national marketplaces for the objective of making a profit. Oil is the most traded commodity worldwide. However, there are other commodities traded, such as gold, cotton, soybeans, wheat, cattle, pork bellies, and sugar. Yes! People trade soybeans. The prices of these commodities are fundamentally based on their demand and supply.  In the past, large corporations have been the main participants in the commodities market.  However, many retail investors now have access to this market via the internet.

So how then do we trade oil?

There are several ways of trading oil. You can trade oil by trading oil futures, trading oil CFDs, trading oil ETFs, trading oil MLPs or investing in oil shares.  For this article, I would talk about the popular way to invest in oil with little money, which is trading oil CFDs. CFDs stands for Contracts for difference. This involves speculating on the oil price difference between the opening and closing of the trade; you do not physically buy oil itself. As a trader, you can take positions based on economic trends or exploiting opportunities in the oil markets.

READ MORE: Oil price plunge brings bears to party at the Nigerian stock market, investors lose N151 billion

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In the oil markets, thousands of companies, retail investors, institutions, and even governments, such as the Mexican government, are all trying to profit from buying and selling oil instruments at the same time. This creates enough liquidity in the market, and prices of these instruments continuously move. A market that moves a lot is known as a volatile market. Market participants often failed to take full advantage of crude oil fluctuations either because they have not understood the dynamics of all these markets. These markets bring more opportunities for profit, but also mean increased risk.

Investing in the oil market

The oil market can be dicey to both the professional and retail investors, with significant price fluctuation occurring daily. Several forces are driving the oil market, and one of the strategies traders use in this market is called arbitrage.

READ ALSO: Nigeria’s foreign debt has breached a 15-year trigger

Arbitrage is the purchase and sale of an asset in order to profit from a difference in the asset’s price between markets. It is a trading strategy that profits by exploiting the price differences of commodities.

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Numerically speaking, if you speculate that the price of oil would drop from $10 to $9.90. you can make money for every cent drop from $10 to $9.90. The difference between $10 to $9.90 is 10 cents, so if you trade with a dollar account and open a position size of $1, you will profit $10 from that movement, which could occur in a few minutes. Looks simple right?

READ MORE: Bitcoin is giving better returns than the Nigerian stock market

So if you traded US oil on Monday using a $1 position size, and sold at $18.35 (which was the market’s opening price) to the historic ‘$0” it traded to, you would have made $1,835 on Monday. (note, this does not account for spreads and commissions issued by your broker) However, you have to note; you can lose money if the price goes in the reverse direction of your prediction/speculation.

Trading in the oil and energy markets requires a certain degree of skill to profit from oil price fluctuations.

 

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Dapo-Thomas Opeoluwa is an Investment Banker and Energy analyst. He holds a degree in MSc. International Business, Banking and Finance from the University of Dundee and also holds a B.Sc in Economics from Redeemers University. As an Oil Analyst at Nairametrics, he focuses mostly on the energy sector, fundamentals for oil prices and analysis behind every market move. Opeoluwa is also experienced in the areas of politics, business consultancy, and investments. You may contact him via his email- [email protected]

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    Business News

    Lagos commences enforcement against building collapse, substandard materials

    The state government has moved to actualize its vision of zero tolerance for building collapse.

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    The Lagos State government said that it has commenced aggressive enforcement against quackery in construction to end building collapse in the state as it called for the support of building professionals.

    This is as the state government has moved to actualize its vision of zero tolerance for building collapse.

    This disclosure was made by the General Manager of Lagos State Materials Testing Laboratory (LSMTL), Mr Olufunsho Elulade, at its inaugural stakeholders’ conference with the theme, ‘Construction, Material Quality Control and Assurance in Lagos State, on Tuesday in Lagos.

    According to a report from the News Agency of Nigeria (NAN), Elulade identified the use of substandard building materials and lack of adherence to quality assurance standards as the major causes of building collapse in the state.

    He said the agency will immediately start standard enforcement in the building construction value chain to ensure the use of the right materials.

    Elulade said, “We are, hereby, using this medium to state the terms of operations with all our stakeholders across the state; we want to partner with you to move the state forward in order to have safer Lagos for the benefit of all.’

    He emphasized the importance of doing away with the menace of quackery, substandard materials and corruption in the construction sector.

    The LSMTL boss outlined the various services offered by its laboratory which includes soil tests, water quality assessment, calibration, destructive and non-destructive tests, among others.

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    While launching the new logo of the agency, Elulade, pointed out that it was a strategy to eliminate quacks and private laboratories using the agency’s old logo to impersonate its operations and mislead the public.

    Also, the Public Relations Officer, Nigerian Institute of Builders (NIOB), Lagos Branch, Mr Olusesanayo Philip said the institute would sustain its public sensitisation campaign adding that the institute was also partnering with LSMTL to sensitise the public on the need to engage professional builders to tame the monster of building collapse in Nigeria.

    What this means

    The enforcement against quackery and the use of substandard materials in the construction value chain by the Lagos State government will come as a huge relief to residents and a boost to its fight against building collapse.

    There have been numerous building collapse incidents in various parts of the state with attendant human casualties, due to the use of substandard materials or non-compliance with the state’s building planning laws and standards.

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    Business

    Burger King to open first outlet by Q4 2021- Franchisee

    Burger King is expected to employ about 6,000 people (direct and indirect) in Nigeria between 2021 and 2026.

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    Burger King

    Burger King, an American multinational hamburger fast food chain, is expected to start its operations in Nigeria by the fourth quarter (Q4) of 2021.

    The company is also expected to employ about 6,000 people (direct and indirect) in the country between 2021 and 2026, other things being equal.

    These were disclosed by Antoine Zammarieh, the Franchisee of Burger King in Nigeria and Managing Director, Allied Food & Confectionary Services Limited, in an interview with Nairametrics on Tuesday.

    He said, “Burger King will start operations by Autumn, i.e between September and November 2021. We have set up the Quality Control unit and have met some of our local suppliers to seal the deal. Also, we have sent some of the ingredients to America to test quality.

    As a company, we are delighted to enter this new market being the largest country in Africa and are looking forward to serving our future guests with our world-famous Burger King meals.

    Most importantly, our goal is to positively contribute to the economy by creating more jobs and employment opportunities. In five years, we hope to directly or indirectly employ between 5,000 and 6,000 people in Nigeria.”

    Zammarieh added that the hamburger maker, in a show of interest in the Nigerian market, had signed a development agreement for the Nigerian market.

    He explained that the development agreement of the chain in Nigeria, which was recently signed, would give more confidence to the Nigerian market and consumers in general, especially during these hard times.

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    What you should know

    Nairametrics had reported, three weeks back, when Zammarieh said, “I always believed in Nigeria and in its people. I am confident this venture will go a long way and prove successful for Burger King, Nigeria, and our company.”

    “I believe this will be a tremendous step towards giving more confidence to the Nigerian market and consumers in general.”

    What to expect

    The first outlet of the hamburger chain in Nigeria is expected to be launched in Lagos.

    The Florida-based restaurant chain is set to join the likes of Dominos Pizza, Krispy Kreme, KFC, and Chicken Republic (pieXpress) in a stiff competition for market share and dominance in a saturated market, with hundreds of other traditional restaurant chains.

    Burger King is expected to dig deep into its quiver of strategies to ensure an impressive performance and success in its first year of operation, as other players have been having it tough following their respective launches into the Nigerian market.

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    The COVID-19 pandemic however has affected the fast-food industry severely, as the disruption to the industry’s supply chain, especially the on-trade channel, which accounts for a significant percentage of restaurant sales, triggered declines in their profits in 2020.

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